A Swiss Gold-backed Currency? Don’t Bet Your Bottom (Fiat) Dollar On It

In two posts, Gold: Always a Store of Value but Never a Currency and The Case for a Genuine Gold Dollar by Murray N. Rothbard – Commentary, we argued against the likelihood of gold or gold-backed currencies reemerging. Today, Egon von Greyerz, in a King World News blog article, mentions a Swiss initiative to try and introduce a 20% gold-backed currency. There is a very simple reason why the Swiss cannot do this on their own.

Owning gold directly has large obstacles for the average person and even the large investor.

  1. There are relatively few reliable sources for buying and selling gold.
  2. There are large transaction costs composed of insurance, delivery, FX conversion, premium over spot, assaying charges (Bank of Nova Scotia at one time) not to mention storage costs.
  3. Gold is relatively expensive per unit even in small sizes such as 1 oz bars, rounds, and bullion coins. There are some smaller units but these are not particularly common.
  4. Transactions can take days to close.

Suppose the Swiss succeeded in creating a 20% gold-backed currency – call it the ‘gold franc’. Further, suppose the government was very strict about maintaining the ratio. Francs could be printed in any denomination and would have to be for commerce. Two things would happen.

Just as all fiat currencies are falling relative to gold, the same currencies would fall in a similar relative fashion to the gold franc. Further, there would be a massive influx into what would be perceived as the only stable currency with intrinsic value. This would be facilitated by the ease with which FX transactions can be made and the possibility of small transactions of even a few gold francs. This would give everyone an easy way of acquiring a claim on gold without the difficulties of trying to take physical possession.

Both factors would send the gold franc rocketing up against fiat currencies. The high currency value would render Swiss industry uncompetitive with the rest of the world and the economy would go into recession. The Swiss National Bank, which until now has controlled the exchange rate of the franc by printing and selling more, would be prevented from doing this by the fixed ratio of gold francs to gold.

For a gold peg to work, all the major currencies would have to convert simultaneously: Bretton Woods IV.

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